5 TAX TIPS if you work abroad
If you have a job overseas or plan to emigrate, here's how to avoid any tax bloopers in India or the country where you choose to live.
1. GLOBAL INCOME IN YOUR TAX RETURN
Governments often demand tax on the global incomes of foreign residents living in their country on a long-term basis. This is set to become more commonplace as governments across the globe, strapped for revenue following the economic crisis, are increasingly exchanging information on tax matters. This is a bid to curb evasion and track money kept in low tax jurisdictions. They are also increasing their focus on high net worth individuals as well as heightening surveillance of accounts held in foreign countries to crack down on financing of terrorism.
Countries such as the US, the UK and Australia now require immigrants who become permanent residents or citizens to report their incomes from all global sources and pay tax accordingly. Temporary residents are not required to declare their global incomes in these countries, but they have to ensure that taxes are paid in the home country. India also requires its residents to pay tax on any income earned overseas, if they ordinarily pay tax in India.
2. WHAT CONSTITUTES GLOBAL INCOME
Global income includes anything earned abroad, from rental income and dividends to interest and capital gains. If you are emigrating from India, make a list of your assets, the cost of acquisition, earnings from these assets and the tax paid on incomes and capital gains. For instance, if you own a house in India that is rented out, it will have to be reported as global income if you become a permanent resident or citizen of another country, but you may not have to pay tax on it.
Permanent residents in the US also have to report inheritances and gifts received in India, though there is no tax liability on such gains either in India or the US.
Conversely, if you are only a temporary resident in these nations, you will have to continue paying taxes in India on the income earned here. You will also have to comply with all the reporting requirements under the Indian tax laws, such as filing the annual information report if a property transaction exceeds Rs 30 lakh. You won't need to declare this income in the country where you are residing temporarily.
3. MANAGE TAX RESIDENCY
The residency rules determine if an NRI has to pay tax in a foreign country in India.There is no common rule across the globe. Countries such as the UK and Australia, which follow the common law system, use a residency test to determine whether a person is required to pay tax in that country. India too follows this system. So, if you have spent more than 182 days in a country, such as India, the UK and Singapore, during the financial year, or more that 729 days in the previous seven financial years, you will have to pay income tax in that country. This means that if you emigrate mid-year, you will pay income tax in India as well as file returns at the end of the year. In the US, foreign residents are taxed as American citizens if they have either acquired a green card or clear the substantial presence/residency test. This test is far more stringent than the residency rules that apply in India and the UK. An individual is said to have satisfied it if he stays at least 31 days in a calender year and 183 days in the current and two preceding years.
To avoid confusion about the number of days spend in a country and prevent double taxation, it will be useful to maintain a travel calendar as well as details of entry and exit as stamped on the passport. Tax authorities could check your passport to determine the residency status. Don't try to fool those guys as they already have the complete picture of your residency status in the country before taking you into consideration.
4. CREDIT FOR TAXES PAID IN INDIA
India has signed double tax avoidance treaty (DTAT) with about 70 countries, including the US, the UK, Australia, Japan, Germany and Switzerland. This ensures that NRIs can claim foreign tax credit if taxes have been paid on incomes and gains made in India. If, however, taxes paid in India are lower than that required to be paid in the country where the the NRI is residing, additional tax will have to be paid. Before you claim foreign tax credit, ensure that you have all the relevant documents as proof.
5. RESIDENCY RULES & DIRECT TAXES CODE
This current residency rules in India will change when the Direct Taxes Code is implemented, most probable from 1 April, 2012. This change will mean that a person will have to pay tax in India if he spends 60 days (previous 182) in the country during a financial year, or 365 days (previous 729) or more in the previous four financial years.